Vlabel overruled by the Council of State in the case of split acquisition and registration of bare ownership and usufruct

After years of dispute between taxpayers and the Flemish Tax Office (Vlabel), the Council of State has quashed Vlabel's position on split acquisition and split registration. Here below we explain where the problem lies and what the consequences of the decision of the Council of State are in practice.

The problematic situations
Two kinds of situations were targeted by the position of Vlabel. The first concerns the split acquisition.
An example for illustration purposes: on the death of the father, it appears that he was the usufructuary of an apartment at the coast and that his only daughter was the bare owner of this apartment. This usufruct will end with the death of the father, so that the daughter is now "promoted" from bare owner to full owner without any inheritance taxes. Now, the law supposes that the father had paid everything at the purchase of this apartment: both his own share (usufruct) as well as that of his daughter (the bare ownership). If that is indeed the case, then upon the acquisition the daughter received a gift, which remained a secret to the outside world (“hidden favouritism”, says the law). For the inheritance tax, it will be considered that the apartment actually belonged to the father and the daughter will have to pay the inheritance tax on the full value. She can avoid this by providing evidence to the contrary.

The second kind of problem situation concerns the split registration. As an example, upon the death of the mother, it appears that she was registered as usufructuary of an investment portfolio at the bank, while her son was registered as bare owner. Comparable to the previous example, the law supposes that the mother established the portfolio “in the name of the son”, just to allow him to be named on the account as bare owner, which is again hidden favouritism. The son will have to pay inheritance taxes on the value of the investments, unless he can provide evidence to the contrary.

How to provide evidence to the contrary – changing views over the years
With the split acquisition the bare owner must demonstrate, among other things, that they were in possession of the necessary personal funds to purchase the bare ownership of the apartment and that they had these funds prior to the purchase. The manner in which these funds came into their possession, is of no importance. The administration has accepted for many years that these funds were gifted by the testator on the condition that this gift took place before the purchase. This was sufficient. It was not required that gift tax be paid at the time of this gift.

From 2013 the federal tax changed tack in that, from then on, the contrary evidence for the hidden favouritism could no longer be provided by showing the existence of a prior gift, unless this gift was subject to registration fees (or gift tax) or unless the recipient was able to freely dispose of the gifted funds. The new position was declared applicable on all legal actions from 1 September 2013. Vlabel decided to follow this view in 2015, although the reference date retained was 1 September 2013.

Furthermore, Vlabel also broadened this view to include the split registration of investments. For Flemish inheritance, a gift of the bare ownership of investments, that precedes the split registration, must therefore be registered (and paid!) in order to be used as contrary evidence so that no inheritance tax is due at a later date. The many families that had placed an investment portfolio or shares of their company into a partnership and had already given shares away with reserve of usufruct, were affected by this decision whereby an adjustment was necessary.

Council of State – annulment of the Vlabel position
However this position found no support in practice, since it was not in accordance with the interpretation of the law. Finally the Vlabel position was presented to the Council of State with a request to annul it. In its judgement, the Council of State thoroughly researched the creation of the law of 1919 (article 9 Inheritance Tax Code) and finally decided that the interpretation of the law according to Vlabel, more specifically the understanding of “hidden favouritism”, and the contrary evidence to be provided, conflicts with the law. The position of Vlabel is then also fully annulled.

Consequences and importance of the judgement
The position of Vlabel regarding the notion of “hidden favouritism” and the contrary evidence to be provided is considered invalid due to a conflict with the law and is considered never to have existed. In a message on its website Vlabel has said that “in files to be handled in future, the nullified position will no longer be applied.”

Furthermore, Vlabel declares that an objection can be entered within 3 months after the date of the notification. Although at first sight there appears to be nothing wrong with this, some voices in the field of law have raised the question of opening a five-year term to ask for the reimbursement of the inheritance tax, from 1 January of the year in which the tax was established (application of article 3.6.0.0.1 VCF (Flemish Fiscal Code) – automatic exemption), possibly even five years from 1 January 2018 (application of article 3.6.0.0.4 VCF – reduction of the assets of the estate).

In addition, the judgement also teaches us that the Council of State seized the historical legal interpretation of article 9 of the Inheritance Tax Code in order to come to its verdict. In terms of interpretation, the judgement is therefore important not just for Flemish inheritance but also for Brussels and Walloon inheritance. Although the object of the dispute was not the federal position about using the prior donation as contrary evidence, it is clear that the interpretation upheld by the federal tax administration since 2013 is equally rejected. Voices were also raised here to the effect that heirs who were taxed by the Brussels or the Walloon region following this interpretation of the law, can request reimbursement.

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